Making the decision to invest your money wisely can make all the difference in how comfortable you are now, and in retirement. Investments provide stability for your long term goals, like buying your first home or retiring. They protect against inflation and help you grow wealth. The investment world is complex, but there are ways to make decisions which can help you achieve your financial objective.
Investing involves risk, but not the kind you play in Vegas. There are risks to investing in stocks, bonds and mutual funds which can directly impact your life and savings. The article below discusses the risks involved when investing, and what you can do to minimize them.
Make sure you can risk your savings
Risk is the essence of investing. All investors must be aware that they are taking on some degree of risk when they choose to invest their money. Survivors of the 2008 financial crisis still blame their investment decisions for the fall-out they experienced. A basic knowledge of what can happen can keep you from over-leveraging your savings and help prevent financial ruin.
Investments are not guaranteed to make you money, but they can make you extremely rich if done correctly. The problem is that most people don’t know how to invest properly, and often choose investments which don’t provide adequate returns, while also exposing them to too much risk.
Best ways to invest your savings
The key to investing is to keep it simple. You can’t expect to make a lot of money by investing your money in the markets. The financial markets are gladiators who will happily fight you for your hard-earned savings if you try to go up against them.
We’ll discuss how to invest your savings, and what are the potential risks, throughout the process. Here are twelve valuable suggestions for how you can achieve success investing your savings.
- 1 – Do not invest all of your money. Anybody who has invested too much cash into the stock market can attest that it can be devastating when you lose all of your money quickly. You have to keep the amount you invest to a minimum, so that if one investment doesn’t pan out, you can simply move your money into another.
- 2 – Invest only in the kinds of investments that suit your goals. Make sure you understand what kind of income you want, and what kind of return on investment (ROI) is possible with the kinds of investments you decide to make. For example, it’s not very smart to invest all money in high yield bonds if your goal is to buy a home for your family.
- 3 – Investing in mutual funds or S&P 500 Index funds is generally the safest way to go. There are plenty of mutual funds and stocks available. And they can help you make money, without putting all of your eggs in one basket (or mutual fund).
- 4 – Diversify your investments. Like, you just put all of your money into high yield bonds, then you can be exposed to enormous risk. You need to spread out your risk by investing in multiple types of investment vehicles. If interest rates rise, then it’s likely that the prices on your bonds will fall. Your investment will lose value.
- 5 – Invest in funds which pay dividends. You can make money by investing in mutual funds which pay interest on the money you invest. This means that the fund will earn a dividend each year, which will be included in your investment. Dividends are not investments, but they are good because they help you earn higher returns on your savings.
- 6 – Understand how dividends are taxed for higher income individuals
- Those who are subject to the Tax Code may be surprised to find out that if they receive dividends from an investment, these dividends may be taxed twice. The reason for this is that there is no agreement between the U.S Post Office and the IRS as to whether or not the IRS considers them taxable income or not .
- 7 – Always know your risk tolerance as an investor. Everybody has a level of risk they can tolerate. If you don’t know what yours is, you could even put your entire life savings on the line, and lose it all by investing too much.
- 8 – There is no substitute for a well thought out investment strategy. It can be tempting to try to invest without one, but this is a bad idea, and most people who do this end up with less money at retirement than they hoped they’d have. You need an investment strategy that’s going to help you reach your goals in the long term, and with your investments intact.
- 9 – Educate yourself. It’s smart to know a little about the market, and understand how it works. As a part of this, you could read up on investing from various sources, from books to online resources. The more you learn about investing, the easier it will be for you to make smart investment decisions.
- 10 – Utilize tools that can help you invest wisely. With all the investment advice out there, it’s tough to separate the good stuff from the products which are designed only to make money for somebody else (which may come at your expense). Investing can be confusing and frustrating unless you know what kind of tools and resources are available to help you succeed.
Bonus tip: Some financial advisors make a lot of money from commissions. This means that they will recommend financial products which pay them a commission, instead of those which are best for you. You can avoid this by investing with an advisor who is committed to getting the most money for you, and not helping themselves.
Bonus tip: Don’t worry about stocks and bonds until you understand investment basics. It’s easy to go out and buy stocks and bonds right away without knowing your risk tolerance, your goals, or how to invest properly. Investing in stocks and bonds can be risky for lower income individuals anyway, so use retirement accounts until you feel comfortable making investments on your own.
Also Read: How to Invest your first Salary?
Severe mistakes to avoid while investing your savings
Somehow, people have become convinced that the stock market is a perfect place to invest their money. The truth is that the stock market is an ideal place for speculators to make money. But it’s not so good for people who are looking for a safe place to park their money.
The stock market can be very dangerous when you invest in all the wrong places. Here are some of the worst mistakes people have made in investing.
1 – Investing in stocks which do not perform well . It’s easy to believe that a particular stock has a good chance of making a big move upward. That’s mostly because it seems like everyone is talking about it. But, if you take a closer look at the company, and how it makes money, you will often discover that the stock has nowhere to go but down.
2 – Investing in overly risky stocks, or stocks which are far too volatile for your taste. Some people like risky investments, but it seems like most people prefer to take less risk than they actually do. This can land you in trouble because many people end up over-investing in the stock market. They don’t realize that much of their money is exposed to unnecessary risks.
3 – Taking unnecessary risks. People attempting to invest their savings without an investment strategy are often vulnerable to falling prey to this mistake. Sometimes, they over-invest in stocks that are already moving upward, only to watch them pull back towards the bottom. This can be disastrous for your investments.
4 – Over-investing in an investment vehicle which is not appropriate for your goals. If you are too cautious with your investment strategy, it can keep you from reaching the long term goals you are working towards. On the other hand, if you are too aggressive with your investments, then you may fail to reach these goals because of losses or an unduly high risk tolerance.
5 – Falling victim to false promises . It’s smart to be skeptical about any investment opportunity that is being marketed as a “must have” product. Also, keep in mind that there are plenty of professional investors who are very good at selling their own products. If something sounds too good to be true, then it’s likely that it is – don’t try to invest your money on the basis of false promises or empty marketing techniques.
6 – Forgetting about taxes . How you invest is important, but where you invest can also make a big difference. Just because you opt for safer investments doesn’t mean that all of your money will be safe forever. Many times, taxes can take a big bite out of an investment vehicle. The best way to protect yourself against this is to choose investments designed for maximum tax benefits.
Hope you learned something from this article. You can refer to our other articles to get more tips on investment.